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The Finance Base
company analysis

Debt-to-Equity vs. Net Debt-to-EBITDA: Which Leverage Ratio Should You Use?

Debt-to-equity measures debt against shareholders’ equity; net debt-to-EBITDA measures net debt against an earnings measure. Choose based on the question, and check company definitions before comparing ratios.

By TheFinanceBase Team 3 min read

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Use debt-to-equity to assess debt relative to shareholders’ equity and a company’s capital structure. Use net debt-to-EBITDA to assess net debt relative to an earnings measure. They answer different questions, so neither is a universal substitute for the other.

What question are you trying to answer?

Your question More relevant ratio What it tells you
How much debt does the company have compared with its owners’ equity? Debt-to-equity Debt in relation to the shareholders’ equity base.
How large is net debt compared with an earnings measure? Net debt-to-EBITDA Net debt in relation to EBITDA.
Is the company over-leveraged or able to service its debt? Neither by itself Both ratios need context, including cash flow, liquidity, debt maturities and interest burden.

The ratios have different numerators and denominators: debt-to-equity compares debt with equity, while net debt-to-EBITDA compares debt after a specified cash deduction with EBITDA. Treat them as complementary lenses, not competing scores. Corporate Finance Institute’s net debt-to-EBITDA guide and its debt-to-equity guide describe these measures and their limitations.

How to calculate each ratio

Debt-to-equity

A common formula is:

Debt-to-equity = total debt ÷ shareholders’ equity

The result expresses debt as a multiple of the company’s equity base. Check what the calculation counts as debt: definitions can vary, and some include fixed-payment obligations or other liabilities. A very small or negative equity balance can also make the ratio unusually large, misleading or difficult to interpret. Review the balance sheet and the company’s industry before drawing conclusions.

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Net debt-to-EBITDA

A common formula is:

Net debt-to-EBITDA = net debt ÷ EBITDA

Net debt is commonly calculated as total debt less cash and cash equivalents. One issuer definition in a filing hosted by the U.S. Securities and Exchange Commission states, “Net debt is total debt, less cash and cash equivalents.” Check whether the company’s calculation deducts the same cash balances you expect, including whether any cash is restricted or otherwise unavailable.

EBITDA is an earnings measure, not cash available to repay debt. It omits interest, taxes, capital expenditure and working-capital movements. Companies may also report adjusted EBITDA using issuer-specific definitions. The SEC staff says that if a company presents EBIT or EBITDA as a performance measure, it should reconcile the measure to net income under GAAP in its statement of operations; see the SEC’s Non-GAAP Financial Measures: Compliance and Disclosure Interpretations.

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Why net debt-to-EBITDA is not a repayment forecast

The ratio relates net debt to EBITDA; it does not tell you exactly how many years repayment will take. EBITDA is not the cash remaining after operating needs, investment, taxes and interest. Actual repayment capacity depends on cash generation and other demands on cash, as well as the timing and terms of debt.

How to compare company-reported ratios

Before comparing figures across companies or periods, check whether the calculations use comparable definitions and inputs:

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  • Debt: Does the numerator include only borrowings, or other liabilities and fixed-payment obligations?
  • Cash: For net debt, which cash and cash-equivalent balances are deducted, and are any restricted?
  • Equity: Is shareholders’ equity unusually small or negative, making debt-to-equity hard to interpret?
  • EBITDA: Is it reported EBITDA or an adjusted, issuer-defined figure? Reconcile non-GAAP measures to reported financial statements where applicable.
  • Period: Are the balance-sheet figures and earnings measure tied to comparable reporting periods?
  • Purpose and context: Is the analysis about capital structure or earnings-relative debt burden? Compare businesses with relevant industry and business-model context.

Loan covenants and issuer presentations may define these ratios differently from common shorthand. Use the company’s stated calculation, then reconcile it to its financial statements when needed. No single cutoff makes either ratio universally good or bad.

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What else to examine before judging leverage

Neither ratio alone establishes solvency or proves that a company can meet its obligations. For a fuller assessment, examine cash flow, available liquidity, debt maturities and interest burden alongside both ratios. These factors help distinguish a balance-sheet comparison from the practical question of whether the company can fund operations and meet payments.

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